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Fund Spy

The Secret of Fairholme's Success

Berkowitz gets creative.

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Few mutual funds look or behave like  Fairholme (FAIRX). That's by design. Manager Bruce Berkowitz knows that to beat the pack, you need to break from it, and he acts accordingly.

Berkowitz's process is the inverse of most managers'. He focuses on what could go wrong, not right, with potential investments. Only after determining that going bust isn't possible does Berkowitz look for a firm's positives. Even then he anchors on the here and now, shunning the projections and big assumptions about the future that are needed for the discounted cash-flow analysis many rivals use. The phrase "positive catalyst" is never uttered at Fairholme. Berkowitz simply looks for firms with loads of cash on their balance sheets and double-digit free cash-flow yields where the coupon appears to be rising or stable. Like Warren Buffett, Berkowitz prefers to be approximately right, rather than precisely wrong.

Off the Beaten Path
Berkowitz and Charlie Fernandez are the only investment professionals at the firm. Berkowitz says having dedicated industry specialists leads to skewed results, as those operating in one space often fall prey to relativism, perhaps advocating for the best option in a horrible group that should be avoided altogether. Instead, Fairholme hires an array of outside experts who not only provide raw data but also try to poke holes in Berkowitz's analysis on specific stocks and bonds. Berkowitz rarely meets with management, preferring a deep dive on the data to see if they've delivered on past promises.

Michael Breen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.